Baidu, Alibaba and Tencent have seen their stock prices plunge this year as slowing growth in their core businesses has shaken investors' confidence in the once soaring stocks. The companies hope to resume rapid growth through their long list of past acquisitions and investments in businesses less focused on online. The strategy, however, has yet to pay off.
China's three Internet super-powers, Baidu Inc, Alibaba Group Holding Ltd and Tencent Holdings Ltd, have come to dominate the country's Internet industry over the past decade. But with the rise of mobile, their growth has slowed noticeably, especially over the last year or so.
The three companies have come under a lot of pressure due to structural changes in their businesses and high expectations from investors.
As a result, the companies have all suffered major slides in their stock prices this year.
Alibaba has seen its market capitalization shrink by $140 billion in the past 10 months. As of Friday, its stock price had fallen to $71.99 a share from a peak of $119 in November 2014. That's a 40 percent drop for a stock that soared 38 percent on the day of its IPO on the New York Stock Exchange on September 19, 2014.
Investors have fled the stock due to a marked slowdown in Alibaba's main business. According to Alibaba's annual report released on October 8, the company's revenue in the most recent fiscal year grew 45.14 percent, though its net profit only rose 3.92 percent. Its most recent quarterly earnings report shows that transaction volume growth - a critical metric for e-commerce companies - fell to 34 percent, down from more than 50 percent in recent years.
Baidu and Tencent have also seen their values shrink recently. Baidu had the highest market capitalization of any Internet company in China in 2011. Over the past year, its stock price has plunged 35 percent. And its profit only grew 3.3 percent in the second quarter, according to its second-quarter financial statement.
Tencent's stock has done better than the other two Internet giants, but its share price is still down 20 percent from its peak earlier this year. Its nearly ubiquitous chat app, WeChat, may have reached a saturation point, which is critical because the app accounts for roughly $50 billion to the company's market value.
Paying for dominance
In some ways, the three companies are all suffering from their own success. With limited room to grow their core online businesses, they have been expanding into new territory off-line. They have all completed acquisitions to enter new businesses including finance, entertainment, transportation, health and education - each of which has more than 1 trillion yuan ($157.2 billion) markets. The three companies have also taken an interest in other ventures, including group buying and online classifieds.
Over the past five years, the three have invested in about 30 listed companies and hundreds of unlisted others. It's not an exaggeration to say that the three giants have, to one extent or another, invested in nearly 80 percent of China's unlisted top 30 Internet companies.
Through these investments, the three companies aim to leverage their competitive advantages by introducing their online services into their new off-line businesses. It's a theory that hasn't worked out well in practice.
Baidu, for example, has tried to integrate its services with the businesses of its acquisitions. When it took a majority stake in nuomi.com, a Chinese group-buying website, in 2014, Baidu aimed to get the website's consumers to use its search and maps services, as well as its mobile app, to search for potential purchases, which it could then monetize with advertisements.
Tencent has expanded its nebulous online-to-offline (O2O) sector by investing in many emerging Internet ventures, such as car-hailing app maker Didi Dache, shopping website JD.com Inc and classified website 58.com. Its goal was to steer payments for these sites and services through WeChat.
Alibaba has also sunk a lot of money into O2O by acquiring assets in film, music, sports and healthcare.
Industry experts say each of the three giants has spent more than 10 billion yuan on O2O, pushing the level of competition in this sector to new heights.
Grasping for control
Although they have made huge investments in O2O, the three Internet giants have discovered that they cannot force these companies to comply with their plans for synergy. They haven't had much success with their off-line acquisitions either.
For example, in 2014, Alibaba invested in Intime Retail (Group) Co Ltd, which operates shopping malls across China. The e-commerce giant hoped its investment would get its payment service, Alipay, accepted at more malls nationwide. As of yet, however, Intime's malls in only a few cities accept Alipay, leaving Alibaba's dream mostly unrealized.
Experts say the problem is that Alibaba, Baidu and Tencent have been more focused on financial investments than strategic investments, even though it is the latter that greatly adds value to a company.
The Internet giants have had trouble exerting influence and control over the off-line companies they have invested in.
The reason for this is that most of these companies' sales and customers come from their off-line businesses, so online is less of a priority, according to a report from Caijing Magazine published on October 12, citing Yao Jinbo, CEO of 58.com.
Analysts also say that venture founders hope to maintain their control over the companies. But as competition intensifies, their shares will be significantly diluted if they want to obtain more financing. So sometimes, they prefer to merge or otherwise cooperate with each other rather than accepting investments.
